Final Regs. Prescribe Treatment of Bond Premium Carryforward

Published January 14, 2014

The IRS issued final regulations on the tax treatment of debt instruments with bond premium carryforward in the holder’s final accrual period (T.D. 9653). The regulations adopt, without substantive change, regulations proposed last January (REG-140437-12) and withdraw the temporary regulations issued at the same time (T.D. 9609).

Last January’s proposed regulations on bond premium carryforward were issued in response to questions the IRS received about a holder’s treatment of a taxable zero-coupon debt instrument, including a Treasury bill, acquired at a premium and with a negative yield. Under prior regulations, a holder that elected to amortize the bond premium generally would have a capital loss upon the sale, retirement, or other disposition of the debt instrument rather than an ordinary deduction under Sec. 171(a)(1) for all or a portion of the bond premium. The IRS has said this situation, which arose as a result of recent market conditions, was not contemplated when the prior regulations were adopted in 1997. The new regulations address this issue by adding a specific rule providing that an electing holder deducts all or a portion of the bond premium under Sec. 171(a)(1) when the instrument is sold, retired, or otherwise disposed of rather than recognizing a capital loss.

Effective date

The regulations, which will be published in the Federal Register on Jan. 15, apply to debt instruments (bonds) acquired on or after Jan. 4, 2013 (the date the temporary regulations were effective), but taxpayers may apply them to bonds acquired before that date.